Who Do You Fancy Best in Business?

Who is the most reliable businessman? Whose business is the riskiest? How can you know what risk the market associates with the businesses run by the likes of Nochi Dankner, Yitzhak Tshuva, Mori Arkin or Gershon Salkind? Why do people associated with Eliezer Fishman or Lev Leviev have to sweat more to borrow from Israel's institutional investors?

There is one criterion no businessman can ignore, however lofty his status - the interest he must pay on loans. Suddenly companies are raising money on the stock market left, right and center, offering a great opportunity to check the market's sentiment about their owners.

When assessing a company's risk premium, investment managers examine the quality of its management and controlling shareholders, and their financial stability. Their conclusions affect how much a company can raise and at what cost.

The common denominator is interest, which is where the investment managers conclusions can be compared. As the Bank of Israel has been gradually lowering its rates for many moons, so anybody raising money two months ago would have paid more than if they'd raised money today. What matters therefore is the spread, the rate above government bonds, not the absolute figure.

When offerings started coming back into fashion, only the most highly rated companies could dare touch the marketplace. But it wasn't long before second- and third-tier companies jumped on the bandwagon. The latest to show up lapping at the market bowl are smaller contractors Isaac Angel and Alfred Akirov.

So far the company the market liked best of the crop this year is Agis Industries (TASE: AGIS), run by Mori Arkin. The drugmaker scored NIS 180 million at a low spread of 1.4 percent above comparable government bonds. Serious pluses for the company were its improving results and the fact that it has no bonds on the market.

"Everybody knows there will never be a shortage of IDB paper because the company will never stop issuing it," one bond player said. "But in Agis' case it's rare, so anybody looking to diversify a portfolio would choose it."

Similar profile

Taro Pharmaceutical Industries (Nasdaq: TARO) has a profile similar to Agis's but had to pay a spread of 1.6 percent, even though its rating is higher. It sports an AA rating , while Agis's is AA-minus. The market explains that Agis carried out a tender, instead of sewing up the offering as Taro did.

Another company to raise money at low cost, indicating the market thinks nice things about its stability, is Gershon Salkind's Electra (TASE: ELTR ). Its issue closed at a spread of 1.5 percent. Compare that with Nochi Dankner's company Discount Investment Corporation (TASE: DISI), a member of the IDB group, which raised the day before at 0.05% more despite having a higher rating from Maalot. Again, Electra bonds are a rarity.

Other IDB group companies raised at spreads of 1.55 percent to as much as 2 percent above comparable government bonds.

The market does esteem Dankner and his reform of IDB. But his high leverage, after the heavy loans he took to buy control of the group, his steps to withdraw large dividends from the group companies, and that whole scandal about the Azorim Properties bonds just as his new career at IDB started out, shadow his margins.

Yitzhak Tshuva also manages to raise money at relatively low cost. His Delek Group (TASE: DLEKG) scored about NIS 500 million at a spread of about 1.55 percent. One person whose status weakened badly in the last three years is Eliezer Fishman.

Historically he was considered one of Israel's greatest powers on the stock market, but a week ago one of his companies raised a paltry sum at a high cost. Jerusalem Economic Corporation (TASE: ECJM) secures NIS 60 million, that's all, at a premium of 2.77 percent above comparable government bonds. One reason is that Maalot has downgraded the Fishman group to A-minus, another is the group's heavy debt burden, and a third is its sliding profits - most of his companies are operating in the black. Fishman's companies are rated but the market isn't eager to give them money, say players.

Despite the sudden boom in issues, plenty of companies have remained outside the market. These include companies from the Nimrodi group, the Shrem, Fudim, Kelner (TASE: SFK ) group, Zeevi, and Gibor Sport Holdings (TASE: GISP). SFK and Nimrodi were famous for hitting the market when it heated up, but are worried about the premiums the players would demand now, or that they'd be ignored outright.

The parameters

One market player noted that the parameters shaping the welcome include sentiment toward the controlling shareholder, his business orientation, and his ethics. Investment managers look at objective criteria such as the Maalot rating (and the rating agency also looks at management quality, and the financial stability of the controlling shareholders), past and expected performance, and sector.

But the market might demand a fat premium from a stable, veteran company if it believes the shareholders will be milking the company for dividends or if the company faces reform, in which case its current stable condition is not dependable.

Bond buyers also check how much of a company's equity is accrued earnings that can be distributed, and what part is assets serving for operations. That is one way to estimate future dividends. If the owner wants to squeeze out dividends in order to repay heavy loans, clearly the company's risk premium is higher, a player explains.

The last year brought at least two examples of businessmen felt to have betrayed the market's trust. Azorim Properties, controlled by Nochi Dankner's Ganden group, was one. It raised NIS 230 million through bonds, after pledging not to invest in the IDB group.

Nor did it, but it did lend NIS 250 million to Nochi Dankner to buy the controlling interest in IDB without informing its bondholders, spurring Maalot to lower its rating by two whole notches. Called to account by the infuriated debt-holders, Ganden sweetened the interest and allowed premature redemption, but the market is still ruffled by the affair.

The other concerned the Dankner family and Ellern Investments (TASE: ELIN ). A few months after hitting the floor as a rock-solid investment group, Ellern announced the biggest shareholders deal in the history of the TASE. It and Ellern Holdings (TASE: ELHD ) were to buy control of three other Dankner family holdings, Israel Salt Industries (TASE: SALT ), Dor Chemicals (TASE: DORC ) and Dankner Investment (TASE: DKNR ), at massive premiums over their market valuations.

It would be paying the Dankners about a billion shekels, Ellern said. Its bonds promptly tanked, sliding to junk status with yields of 18 percent, and its bondholders felt cheated. The Ellern deal has yet to be completed, but recently, as the market rallied, the first payment on the bonds came due. Ellern's bonds recovered somewhat and are now trading at 9.2 percent, a premium of 5 percent above comparable government bonds.

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